Uncertain times increase the risk of M&A transaction failure, warned Alvarez & Marsal recently.
In uncertain times such as the current pandemic, businesses might struggle to meet projections made prior to or during the health crisis, resulting in a higher risk of M&A deals falling apart, said the professional services firm.
M&A transaction disputes can be costly and take years to resolve, Chris Fordham, Managing Director of Disputes and Investigations Asia, Alvarez & Marsal pointed out.
A significant proportion of M&A transactions result in disputes, and a sizeable percentage of these are subject to fraudulent behaviour involving financial misstatement and/or withholding of important accounting data, he noted, adding that frauds occurring in these difficult times are bound to be discovered later and taint transactions into the future.
Disputes typically arise when the buyer discovers after the closing date that the purchased assets are not consistent with the agreed assets, when a liability emerges of which the buyer was not aware prior to the purchase, or when projections and forecasts relied upon by the buyer turn out to be manifestly unachievable, Fordham observed.
Fraud allegations may also emerge between the parties about the preparation of the data provided during the due diligence process upon which the buyer relied to reach their investment decision, he added.
As a result, there is a need for investigations of the allegations and counter-allegations, to assess the accounting issues and examine whether or not the sale and purchase agreement has been breached, he advised.
Mitigating M&A dispute risks
While future economic and market factors are difficult to anticipate and, despite best efforts, there might be an unanticipated change in the market that neither party could have anticipated such as this pandemic, there are other factors that exacerbate transaction disputes that can be mitigated with some planning and attention to detail prior to the signing of the sale and purchase agreement, the firm said.
In order to mitigate transaction dispute risks, Trevor Dick, Managing Director of Disputes and Investigations Asia, Alvarez & Marsal advised companies to do the followings:
- Approach M&A due diligence with a forensic mindset and increased levels of caution towards the business, key individuals, customers and suppliers.
- Specify and provide pro-forma examples of all purchase price adjustments to eliminate wiggle room on the part of buyer or seller when producing post-closing calculations.
- Agree on the use of expert determination where applicable.